Worries over Argentine wetness and low US winter wheat sowings prompted hedge funds to hike their net long in ags by the most in six months - provoking concerns that the buying may have gone too far.

Managed money, a proxy for speculators, lifted its net long position in futures and options in the top 13 US-traded agricultural commodities, from corn to sugar, by 113,672 contracts in the week to last Tuesday, analysis of data from the Commodity Futures Trading Commission regulator shows.

The buying spree drove the net long - the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – to its highest since July, extending the apparently enhanced appeal of ags so far in 2017.

In three weeks, hedge funds have now hiked their net long in ags by more than 215,000 contracts, helping ag prices , as measured by the Bcom ag index, rise by 7.2% so far in 2017.

'Prices reacted to Argentine concerns'

The buying in the latest week was driven by grains (including the soy complex) in which hedge funds hiked their net long by more than 97,000 contracts to a six-month high of 156,808 contracts.
Speculators' net longs in Chicago grains, Jan 17 (change on week)

Soybeans: 131,522, (+35,632)

Soyoil: 85,282, (+6,658)

Soymeal: 49,496, (+26,486)

Kansas wheat: 26,909 (+3,305)

Corn: -51,385, (+25,179)

Chicago wheat: -85,017, (-49)

Sources: Agrimoney.com, CFTC

Purchasing was encouraged in part by worries over rains in Argentina destroying a substantial area of newly-planted soybeans crops, with speculators buying into the oilseed at their fastest rate in six months.

In soymeal, the soybean processing product of which Argentina is the top exporter, hedge funds hiked their net long by more than 26,000 lots – the most for any week on data going back to 2006.

A lower-than-expected forecast by the US Department of Agriculture, in its latest Wasde crop report, for US soybean stocks of the close of 2016-17 also supported prices.

"Chicago soybeans and soymeal rallied 5.5% and 9.9%, respectively" in the week to last Tuesday, Rabobank said, noting that "prices reacted to Argentine weather concerns and the USDA's January Wasde".

'Big wheat buying'

Hard winter wheat was also a major beneficiary of speculative buying, with the net long in the Kansas City-traded contract rising nearly to 27,000 contracts for the first time since June 2014.

Speculators' net longs in New York softs, Jan 17, (change on week)

Raw sugar: 161,630, (+3,747)

Cotton: 84,635, (-5,580)

Arabica coffee: 22,163, (+8,598)

Cocoa: -3,924, (-504)

Sources: Agrimoney.com, CFTC

The spree, which helped Kansas City futures touch their highest in six months, was fuelled by separate USDA data showing US winter wheat sowings at their lowest since 1909, with hard wheat plantings particularly weak.

Furthermore, grain market sentiment received support from ideas of buying by index funds, which were seen as snapping up wheat and corn futures, as part of their annual "rebalancing", in which they reweight portfolios back to levels mandated by the index followed – a process which often involves buying laggards of the previous year and selling the best performers.

In the two weeks to January 17, index funds raised their net long in Chicago corn by nearly 34,000 contracts, and in Chicago wheat by more than 26,000 lots, plus nearly 10,000 Kansas City wheat contracts, the CFTC data showed.

However, the extent of the hedge fund buying raised concerns that appetite for further purchases may be more muted.

Speculators' net longs in Chicago livestock, Jan 17, (change on week)

Live cattle: 105,538, (+5,996)

Lean hogs: 56,927, (+3,114)

Feeder cattle: 7,992, (+1,090)

Sources: Agrimoney.com, CFTC

Richard Feltes at Chicago broker RJ O'Brien saw the "ballooning" managed money net long in soybeans as a "bearish" influence prices short-term, while also flagging a "smaller-than-expected" net short figure for corn.

In Kansas City hard red winter wheat, Benson Quinn Commodities, flagging the continued rise in the net long, said that it "wouldn't rule out the selling of some of this position", although did see scope for buying in Chicago wheat, of which short-covering was surprisingly low in the latest week.

"The managed money net short of 85,000 contracts seems manageable, but it wouldn't take much of a rally to force more short-covering," Benson Quinn Commodities said.

Coffee, cattle buying

Among soft commodities, a rise in the net long was driven by a recovery in sentiment over coffee prices, amid ideas of a drop in Brazilian output this year, as forecast by official crop bureau Conab.

Rabobank flagged issues in particular for the robusta coffee market from continued dryness in Espнrito Santo, the top Brazilian state for growing the variety, and with "expectations for Brazil to allow robusta imports for its soluble export business".

And in the livestock complex, hedge funds raised their net long in Chicago live cattle futures and options above 100,000 lots for the first time in two years, amid a rally being spurred by a boost to cash markets from a relative squeeze on animal supplies.

The rise in cattle prices, at a time of declining beef prices, has provoked a deepening decline in beef packers' margins - estimated by HedgersEdge at a negative $40.20 per animal as of Friday, compared with a negative $26.76 a week before – in turn raising doubts over processors' demand.

"Ongoing weakness in the price of value beef cuts could make packers more reluctant buyers come February and March, but we will likely need to see much more significant [beef] price erosion for that to be the case," said Paragon Economics and Steiner Consulting.

"For the moment it does not appear that the packer situation is dire enough to force them to back off the market in a big way."

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